I don’t mean to be flippant. I’m not trying to be: I am genuinely convinced that the cryptocurrency crash has been a valuable educational experience—for me, at least.
After all, if you have been interested in cryptocurrencies for a while already, you can probably see what’s coming. You know that they are going to crash and burn and lose most of their value. And since cryptocurrencies are going to fail anyway, what are you losing by learning from their failure?
Of course, it’s important to recognize that this is a very different situation than the ones we have always been used to. Ordinary companies die all the time. But these crashes were not ordinary failures; they were spectacular and spectacularly public. And because of that, I think we can learn something important about how to do business in the 21st century.
One of the most important things we learned from the cryptocurrency crash is that people who get burned by bad decisions in their own lives are less likely to make those mistakes themselves in the future.
During the crash, a lot of people got burned investing in an ICO or some other cryptocurrency project. I don’t blame them for being shocked when the value of their investments went into free fall. But remember: People who make dumb investments aren’t really bad at investing. They’re just bad at making generalizations.
People who invest in ICO’s are usually not bad investors; they’re just bad at making generalizations. They know that bitcoin is a good thing, but they probably don’t know how to get it, and so they think that on-chain currencies are good too. If you see an ICO with a million dollars in funding and a whitepaper promising revolutionary technology backed by complex math, chances are pretty good that it’s just another whitepaper promising revolutionary technology backed by complex math.
The first thing we learned is that price does not equal value. But it is too obvious to have a blog about it. We need to know more.
Our second lesson is that a currency is not just any object: it has to be useful, or people won’t use it. The problem with the cryptocurrency boom of the past year was that no one needed those cryptocurrencies. It’s like having a currency that’s only valuable if everyone wants to use it.
The utility of a currency comes from the things you can do with that currency**
Bitcoin recovered and is now trading at $6,600 a coin. This is not a bad price for the asset class, but it is a far cry from the peaks of December 2017, when bitcoin was worth more than $20,000 a unit. There are currently more than 1,400 cryptocurrencies available to invest in.
In February 2010, when the market first opened for business, there were 100 different cryptoassets trading on an exchange in Japan. One year later there were 1,500; by the end of 2013 there were 2,500; by early 2017 there were 10,000; and then in late 2017 something amazing happened:
The volume of bitcoin traded increased from $1 billion to almost $8 billion on one day alone. The value of all cryptocurrencies started rising rapidly as people became aware that this was not just another internet fad. From about 4 p.m. on December 4th until midnight on December 6th a single bitcoin traded at an average price of around $19,000. By early January 2018 most cryptocurrencies had doubled or tripled in value and some had reached heights of more than 1,000 percent.
Ten months later it is still hard to predict what will happen next with cryptocurrencies.
You may not have heard of him, but that’s because he’s been dead for a year. On April Fool’s day in 2013, Satoshi Nakamoto sent a message to a mailing list he had been using. It was his last message as an unknown. He said that he was or would soon be “leaving the scene” and deleted his account. He didn’t specify how long he was going to be gone—he just said it was “soon.”
The next thing we knew, on January 6, 2014, the price of bitcoin had dropped by over 80 percent, from $1200 to $160. This was an even bigger drop than most cryptocurrencies have seen; this is the largest single-day drop ever recorded.
Cryptocurrency is a new form of electronic money that is produced through encryption techniques. Cryptocurrency can be used to pay for goods and services or held as an investment.
1. Do not invest more than you can afford to lose.